Where Can We Get a Shared-Equity Mortgage to Pay Off Our Debt?

We have a house worth 610,000-620,000. First mortgage owed 279,000/4% fixed. 2nd 120,000 4.75% interest only. We have accumulated 125,000 in debt beyond that in student loans, husband playing Mr. Mom and taking care of his parents.

We have no late payments but would like to get back on our feet. My husband is getting back into the workforce but right now our DTI is too high at about 53%. We have enough equity that we would like to not settle but actually pay this off. If we could just find a company that would give us a shared equity loan or a 20 year home equity loan we would get out of debt quickly. It would also bring our DTI down plus my husband will be working which will bring it down further.

Are there companies willing to work with us with this scenario? Either a shared equity or interest only home equity or anything else would help. We want to pay all of our debt. We live in the state of Indiana. Thanks for any advice.

Cindy

Answer:

Dear Cindy,

You have a lot of options here. For example, you could:

Get a new larger second mortgage, pay off the first and have the cash you need;

Look at a home equity loan;

Consider a home equity line of credit;

Hunt for an interest-only balloon note (uck); or,

Maybe even get into an equity share loan.

The shared-equity mortgage is probably the most unique and not readily available. For those who may not be aware, this type of mortgage is typically used to assist homebuyers with down payments. Borrowers make no payments on the loan until they sell or refinance the home. Shared-equity loans are used for smaller amounts most often.

The downsides to this type of mortgage are that it can reduce the appreciation value of the home you would receive, can cost more than a conventional mortgage, and with so few lenders in this space, there will be limited opportunity to shop around for a good deal.

It sounds to me a bit like you realize the new $125,000 loan plus costs is going to really make your payments high. That high debt to income ratio is going to push up your interest rates and increase your risk of losing the home if you experience an unexpected reduction in income in the future.

I’m curious what the current second mortgage was used for? You can post your answer in a comment below.

Just from what you’ve shared with me it seems to me with your husband going back to work you could really focus on reducing the student loans with accelerated payments rather than taking on the additional risk of mortgaging your home to the gills.

I don’t see a need to rush into a loan or put yourself in a position where you have to take on a risky loan product against your home.

A loan may feel like an easy way out but it has costs seen and unseen. For example, when you say if someone will just give you a 20-year home equity loan “we would get out of debt quickly.” You are not, in fact, getting out of debt, just trading one loan for another.

The two ways you actually get out of debt are by eliminating the obligation or paying it off in full or with modified terms.

Just to cover my bases here, I want to state the obvious. If you sell your current home you would have enough money to pay off all the debt and still have a nice chunk to start over in a new home. Your overall payments could be substantially lower, giving you an opportunity to build retirement savings and an emergency fund.

Be careful when looking into a shared equity arrangement. I notice that you call it a “mortgage,” but many of them are not structured as mortgage loans and the companies offering them do not consider them “loans” – so they say the consumer protections applicable to loans do not apply.

Shared equity products are fairly new and they vary widely. In general, the idea is that a company buys a share of your house and you agree to buy it back or sell the property after a certain period of time. But read the contract very carefully. If you can’t buy them out or sell the property, they may have the right to sell the house out from under you. There are all kinds of reasons you might not be able to sell or refinance, for example, you may have lost your job or gotten sick.

If you decide to look into one, hire your own attorney to review the documents and explain all the risks. Attorneys aren’t cheap but it’ll be worth the money to avoid a disaster later.

Everything you said makes sense. We took out the the equity loan to improve the house which we did a lot of the work ourselves.We bought the cheapest house on a high end neighborhood. The value has gone up a a lot. A ranch two doors down just sold for $629,000 and another 5 houses down just sold in 8 days for $769,000. There are 2 more nearby that are near the $800,000 range. Just explaining our strategy,. Understanding Zillow doesn’t have the most reliable estimates, they have our home at $770,000. The reason for a quick long term equity loan is we don’t want to start being late on our bills. A long term loan will make the initial payments manageable while we get back on our feet. We would get it paid off much sooner than 20 years. Thanks for your input.